[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 163-167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32257]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20797; 812-8422]
MID CAP SPDR Trust, Series 1, et al.; Notice of Application
December 23, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Order under the Investment Company
Act of 1940 (``Act'').
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Applicants: MID CAP SPDR Trust, Series 1 (``Trust'') and PDR Services
Corporation (together with any person directly or indirectly
controlling, controlled by, or under common control with, PDR Services,
the ``Sponsor'').
Relevant Act Sections: Order requested under section 6(c) granting an
exemption from sections 4(2), 14(a), 17(a) (1), 17(a) (2), 22(d),
22(e), 24(d), 26(a) (C) and rule 22c-1; under section 17(b) granting an
exemption from sections 17(a)(1) and 17(a)(2); and under rule 17d-1 to
permit certain joint transactions with affiliates.
Summary of Application: Applicants request an order permitting:
(1) the Trust to issue non-redeemable securities (``MID CAP
SPDRs'');
(2) secondary market transactions in MID CAP SPDRs at negotiated
prices, rather than at a current public offering price described in the
prospectus;
(3) dealers to sell MID CAP SPDRs to purchasers in the secondary
market unaccompanied by a prospectus, when prospectus delivery is not
required by the Securities Act of 1933;
(4) certain expenses associated with the creation and maintenance
of the Trust to be borne by the Trust, rather than by the Sponsor;
(5) affiliated persons of the Trust to deposit securities into, and
receive securities from, the Trust in connection with the purchase and
redemption of MID CAP SPDRs; and
(6) the Trust to reimburse the Sponsor for payment of an annual
licensing fee to Standard & Poor's. The order would also temporarily
permit the Trust to satisfy redemption requests within five business
days rather than seven calendar days and exempt the Sponsor from the
Act's requirement that it purchase, or place with others, $100,000
worth of MID CAP SPDRs;
Filing Date: The application was filed on May 28, 1993; and amended on
July 13, 1994. By letter dated December 23, 1994, counsel, on behalf of
applicants, agreed to file a further amendment during the notice period
to make certain technical changes. This notice reflects the changes to
be made to the application by such further amendment.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on January 17,
1995, and should be accompanied by proof of service on the applicants,
in the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
Addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC
20549. Applicants, c/o American Stock Exchange, Inc., 86 Trinity Place,
New York, New York 10006.
For Further Information Contact: Felice R. Foundos, Staff Attorney, at
(202) 942-0571, or Robert A. Robertson, Branch Chief, at (202) 942-0564
(Division of Investment Management, Office of Investment Company
Regulation).
Supplementary Information: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Trust is a unit investment trust (``UIT'') that will be
organized under the laws of the State of New York. The Trust is
designed to provide investors with a low-cost instrument that closely
tracks the Standard & Poor's MidCap 400 Index (``S&P MidCap 400
Index''), that trades like a share of common stock, and that pays
quarterly dividends proportionate to those paid by the portfolio of
stocks that constitutes the S&P MidCap 400 Index.\1\ The Sponsor is a
wholly-owned subsidiary of the American Stock Exchange (``AMEX''). The
Bank of New York (``Trustee'') will act as trustee of the Trust. PDR
Distributors, Inc. (``Distributor''), a registered broker-dealer and
wholly-owned subsidiary of Signature Financial Group, Inc., will serve
as the distributor [[Page 164]] of the Trust's securities, known as MID
CAP SPDRs (for Standard & Poor's MidCap 400 Portfolio Depositary
Receipts).
\1\The S&P MidCap 400 Index is an index that focuses on middle
capitalization stocks not included in the Standard and Poor's 500
Composite Stock Price Index (``S&P 500 Index''). The issues included
in the S&P MidCap 400 Index were selected from a population of 1,700
securities, each with a 1990 year-end capitalization of between $200
million and $5 billion. As of December 31, 1993, applicants estimate
that over $6 billion was invested in or indexed to the S&P MidCap
400 Index.
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2. Units of beneficial interest in the Trust will be issued in
aggregates of 25,000 MID CAP SPDRs known as ``Creation Units.'' Each
MID CAP SPDR will be worth one-fifth the value of the S&P MidCap Index,
or approximately $34 at the time of filing the application. Each
Creation Unit, therefore, would cost about $850,000.
3. All orders to purchase Creation Units from the Trust must be
placed with the Distributor, who shall be responsible for transmitting
such orders to the Trustee. The Distributor will furnish to purchasers
confirmation that the orders have been accepted, but shall reject any
order that is not in proper form. Upon acceptance of an order, the
Distributor will instruct the Trustee to initiate the appropriate
procedures. The Distributor will maintain records of the orders placed
with it, the confirmations of acceptances it issues, and the
instructions to implement delivery. The Distributor will be responsible
for distributing prospectuses and may provide certain other
administrative services, such as those related to state securities
compliance. The Sponsor will pay the Distributor a fee for its
services. The Sponsor will not seek reimbursement from the Trust for
the payment of such fee without obtaining exemptive relief from the
SEC.
4. Investors wishing to purchase a Creation Unit must transfer to
the Trust a ``Portfolio Deposit,'' which consists of: (a) a portfolio
of securities that is substantially similar, in composition, to the
component securities (``Index Securities'') of the S&P MidCap 400
Index; (b) a cash payment equal to the dividends accrued on the Trust's
portfolio securities since the last dividend payment by the Trust, net
of expenses and liabilities, on a Creation Unit basis; and (c) a cash
payment or credit (``Balancing Amount'') designed to equalize the net
asset value of the S&P MidCap 400 Index and the net asset value of a
Portfolio Deposit. The Balancing Amount is required because, among
other things, a Portfolio Deposit, unlike the S&P MidCap 400 Index,
cannot contain fractional shares. An investor making a Portfolio
Deposit also will be charged a nominal service fee (``Transaction
Fee'') to defray securities settlement costs, as discussed below.
5. MID CAP SPDRs will not be individually redeemable, except upon
termination of the Trust. To redeem, an investor must accumulate enough
MID CAP SPDRs to reconstitute a Creation Unit. An investor redeeming a
Creation Unit will receive Index Securities and cash identical to the
Portfolio Deposit required of an investor wishing to purchase a
Creation Unit on that date.
6. Because a redeeming shareholder will receive a Portfolio Deposit
in exchange for its Creation Unit, and only a minute portion of a
Portfolio Deposit consists of cash, the Trustee will not be forced to
maintain large cash reserves for redemptions. This should allow the
Trust's resources to be committed as fully as possible to tracking the
S&P MidCap 400 Index, enabling the Trust to track the Index more
closely than other basket products that must allocate a much greater
portion of their assets for cash redemptions.
7. Persons obtaining MID CAP SPDRs from the Trust in Creation Unit
size aggregations may hold those MID CAP SPDRs or sell some or all of
them into the secondary market. MID CAP SPDRs will be listed on the
AMEX and traded in the secondary market in the same manner as other
equity securities. The price of MID CAP SPDRs on the AMEX will be based
on a current bid/offer market. Transactions involving the sale of MID
CAP SPDRs will be subject to customary brokerage commissions and
charges.
8. Applicants expect that the price at which MID CAP SPDRs trade
will be disciplined by arbitrage opportunities created by the ability
to purchase or redeem Creation Unit-size aggregations at net asset
value, which should ensure that MID CAP SPDRs will not trade at a
material discount or premium in relation to net asset value.
9. To be eligible to purchase a Creation Unit, an organization must
be a participant in the continuous net settlement system of the
National Securities Clearing Corporation (``NSCC'') or a Depository
Trust Company (``DTC'') participant, but is not required to be an AMEX
member. The procedures employed to process a purchase order will depend
upon whether the transaction is settled through NSCC or DTC. Procedures
for redeeming a Creation Unit are analogous to those for purchasing
one, although redemption requests are placed with the Trustee, rather
than the Distributor.
10. MID CAP SPDRs will be registered in book-entry form only;
certificates will not be issued. The DTC or its nominee will be the
registered owner of all outstanding MID CAP SPDRs. Records reflecting
the beneficial owners of MID CAP SPDRs will be maintained by the DTC or
the DTC participants.
11. Persons purchasing Creation Units will be cautioned in the
prospectus that some activities on their part may, depending on the
circumstances, result in their being deemed statutory underwriters. For
example, a broker-dealer firm may be deemed a statutory underwriter if
it purchases Creation Units from the Trust, breaks them down into the
constituent MID CAP SPDRs, and sells the MID CAP SPDRs directly to its
customers; or if it chooses to couple the creation of a supply of new
MID CAP SPDRs with an active selling effort involving solicitation of a
secondary market demand for MID CAP SPDRs. The prospectus will state
that whether a person is an underwriter depends upon all the facts and
circumstances pertaining to that person's activities. The prospectus
will explain that (a) a statutory underwriter will be subject to
certain liability provisions of the Securities Act, and (b) dealers who
are statutory underwriters, and dealers effecting transactions in MID
CAP SPDRs that are part of an ``unsold allotment'' within the meaning
of section 4(3)(C) of the Securities Act, will be unable to take
advantage of the prospectus delivery exemption provided to dealers by
section 4(3) of the Securities Act.
12. As provided in the rules of the AMEX, applicants will make
available a ``Product Description'' of MID CAP SPDRs to members and
member organizations for distributions by them to customers purchasing
MID CAP SPDRs. In addition, members are required to include the Product
Description with sales materials relating to MID CAP SPDRs that is
provided to the public. The Product Description is designed to provide
a brief and readily understandable description of the salient aspects
of MID CAP SPDRs. The Product Description will advise investors that a
prospectus is available without charge upon request. Although the AMEX
rule cannot ensure delivery of a Product Description to investors
purchasing MID CAP SPDRs through a non-member broker-dealer in a
transaction away from the AMEX floor, applicants expect that such
transactions should be extremely rare. In addition, applicants note
that transactions effected on regional exchanges pursuant to unlisted
trading privileges can be covered by conditioning the grant of such
privileges upon imposition of an exchange requirement that Product
Descriptions be delivered. Purchases effected over the counter may be
somewhat more difficult to address, although applicants note that the
National Association of Securities Dealers, Inc. may wish to promulgate
an advice to members regarding the need to distribute a Product
Description to every [[Page 165]] MID CAP SPDR purchaser on the same
terms as required by the AMEX rule.
13. During the first two years of operation, the Trustee will be
paid a ``Trustee's Fee'' of 12/100 of 1% of the Trust's net asset value
annually. Thereafter, the Trustee's Fee will vary from 10/100 to 14/100
of 1% per annum, depending on the net asset value of the Trust. The
Trustee may waive all or a portion of the Trustee's fee. The Trustee
also will receive a Transaction Fee directly from investors in
connection with certain creations and redemptions of Creation Units to
defray securities settlement costs. The Transaction Fee will vary from
$250 to $1500 per Creation Unit depending upon the number of Creation
Units the investor creates or redeems. An additional amount not to
exceed three times the Transaction Fee will be charged to investors who
purchase and redeem via the DTC rather than the continuous net
settlement system of NSCC, to cover the increased expense associated
with settlement outside the NSCC clearing process. The Sponsor may
modify or waive the Transaction Fee for certain lot-size creations or
redemptions. Any increase of the Transaction Fee will be subject to a
maximum of 20/100 of 1% of the value of a Creation Unit at the time of
creation or redemption, as the case may be. All variations in the
Transaction Fee will be imposed in compliance with rule 22d-1, as if it
were a sales load. The Trustee also will receive as compensation any
benefit derived from holding funds of the Trust in non-interest bearing
accounts.
14. The Trust will make quarterly distributions of an amount
representing the dividends accumulated on portfolio securities during
such quarter, net of fees and expenses. Additional distributions will
be made to the minimum extent necessary to comply with certain
provisions of the Internal Revenue Code and to avoid the imposition of
excise taxes imposed by section 4982 of the Code. The Trust also
intends to make available the DTC book entry Dividend Reinvestment
Service through which investors may have their dividend distributions
reinvested in MID CAP SPDRs. The Trust's prospectus will disclose that
brokerage commissions, if any, incurred in obtaining the Index
Securities necessary to create additional MID CAP SPDRs with the cash
from these distributions will be an expense of the Trust.
15. Beneficial owners of MID CAP SPDRs will have no voting rights
with respect to the securities held by the Trust. The Trustee will have
the right to vote all of the voting stocks in the Trust. The Trustee
will vote the Trust's shares in the same proportion as all other shares
of the security are voted. If this arrangement is not permitted, the
Trustee shall abstain from voting.
16. Applicants assert that MID CAP SPDRs afford significant
benefits in the public interest. MID CAP SPDRs, which track non-S&P 500
securities, will broaden the trading, investing, and hedging
opportunities available to investors by tracking an alternative segment
of the domestic equity securities market, stocks with mid-range
capitalizations. Applicants believe that MID CAP SPDRs enhance the
choices available to investors and provide a cost-effective mechanism
for investing in the targeted market segment. Further, the Trust should
be able to track the S&P MidCap 400 Index more closely than other
basket products that must allocate a portion of their assets for cash
redemptions. In addition, MID CAP SPDRs will provide a low-cost market-
basket security that, unlike open-end index funds, can be traded at
negotiated prices throughout the business day.
Applicants' Legal Analysis
1. Applicants request an order granting an exemption from sections
4(2), 14(a), 17(a)(1), 17(a)(2), 22(d), 22(e), 24(d), and 26(a)(2)(C)
and rule 22c-1 and permitting them to engage in affiliated transactions
otherwise prohibited by section 17(d) and rule 17d-1. Applicants
represent that the relief requested herein is substantially similar to
that granted in the application concerning the Standard and Poor's
Depositary Receipts (``SPDRs''), a similar instrument that tracks the
S&P 500 Index.\2\
\2\See SPDR Trust, Series 1, Investment Company Act Release Nos.
18959 (Sept. 17, 1992) (notice) and 19055 (October 26, 1992) (order)
(``SPDR Order'').
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2. Section 4(2) of the Act defines a UIT as an investment company
that, among other things, issues only redeemable securities. Because
MID CAP SPDRs are not individually redeemable, applicants request an
order that would permit the Trust to register and operate as a UIT.
Applicants note that beneficial owners of MID CAP SPDRs wishing to
redeem may purchase additional MID CAP SPDRs and tender the resulting
Creation Unit for redemption. Moreover, because the market price of MID
CAP SPDRs will be disciplined by arbitrage opportunities, beneficial
owners should be able to sell MID CAP SPDRs at approximately net asset
value.
3. Section 22(d), among other things, prohibits a dealer from
selling a redeemable security that is being currently offered to the
public by or through an underwriter, except at a current public
offering price described in the prospectus. Rule 22c-1 generally
requires that a dealer selling, redeeming, or repurchasing a redeemable
security do so only at a price based on its net asset value. Secondary
market transactions in MID CAP SPDRs will take place at negotiated
prices (generally the current bid/offer price quoted on the AMEX), not
at a current offering price described in the prospectus, and not at a
price based on net asset value. Thus, purchases and sales of MID CAP
SPDRs by dealers in the secondary market will not comply with section
22(d) and rule 22c-1. Accordingly, applicants have requested an
exemption from these two provisions.
4. The concerns sought to be addressed by section 22(d) and rule
22c-1 with respect to pricing are equally satisfied by the proposed
method of pricing MID CAP SPDRs. While there is little legislative
history regarding section 22(d), its provisions, as well as those of
rule 22c-1, appear to have been enacted (a) to prevent dilution caused
by certain riskless-trading schemes by principal underwriters and
contract dealers, (b) to prevent unjust discrimination or preferential
treatment among buyers resulting from sales at different prices, and
(c) to assure an orderly distribution of investment company shares by
eliminating price competition from dealers offering shares at less than
the published sales price and repurchasing shares at more than the
published redemption price. Applicants believe that none of these
purposes will be thwarted by permitting MID CAP SPDRs to trade in the
secondary market at negotiated prices. First, secondary market trading
in MID CAP SPDRs, because it does not involve the Trust as a party,
cannot result in dilution of a beneficial owner's investment. Second,
to the extent different prices exist during a given trading day, or
from day to day, such variances occur as a result of third-party market
forces, such as supply and demand and interest rates, not as a result
of unjust or discriminatory manipulation. Therefore, secondary market
trading in MID CAP SPDRs will not lead to discrimination or
preferential treatment among purchasers. Finally, applicants contend
that the proposed distribution system will be orderly because arbitrage
activity will ensure that the difference between the market price of
MID CAP SPDRs and their net asset value remains narrow.
5. Section 24(d) of the Act provides, in relevant part, that the
prospectus delivery exemption provided to dealer
[[Page 166]] transactions by section 4(3) of the Securities Act does
not apply to any transaction in a redeemable security issued by a UIT.
If MID CAP SPDRs are viewed as redeemable because Creation Units are
redeemable and MID CAP SPDRs are deemed to be securities of the same
class, section 24 would apply. Because the applicability of section
24(d) is not free from doubt, applicants have requested an exemption
from that section to permit dealers trading in MID CAP SPDRs to rely on
the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Assuming section 24(d) applies, the exemption is
necessary because, according to applicants, the imposition of
prospectus delivery requirements on transactions by dealers in the
secondary market will materially and adversely impede the success of
the MID CAP SPDRs product.
6. Applicants note that the secondary market for MID CAP SPDRs is
significantly different from the typical secondary market for UIT
securities, which usually is maintained by the sponsor. MID CAP SPDRs
will be listed on a national securities exchange and will be traded in
a manner similar to the shares of common stock issued by operating
companies and closed-end investment companies. Dealers selling shares
of operating companies and closed-end funds in the secondary market
generally are not required to deliver a prospectus to the purchaser.
Applicants contend that the MID CAP SPDRs should be subject to the same
regulatory scheme as securities issued by operating companies and
closed-end funds.
7. Because MID CAP SPDRs will be exchange-listed, prospective
investors will have access to several types of information about the
product. Information regarding sales price and volume will be
continually available on a real time basis throughout the day on
brokers' computer screens and other electronic services, such as
Quotron. The previous day's price and volume information will be
published daily in the financial section of newspapers. Applicants also
will publish daily, on a per MID CAP SPDR basis, the amount of
accumulated dividends, net of accrued expenses. In addition, applicants
expect that MID CAP SPDRs, like SPDRs, will be viewed as a novel, cost-
effective, index security and will generate significant interest in the
financial community. Applicants expect that broker-dealers and market
analysts will familiarize themselves with the product, follow its
performance, and share their opinions of the product with clients and
other investors, resulting in even greater amounts of available
information for investors.
8. In addition to all the information set forth above, investors
will receive the Product Description. While not intended to substitute
for a full prospectus, the Product Description will contain useful
information about MID CAP SPDRs.
9. Section 26(a)(2)(C) requires, among other things, that the trust
indenture prohibit payments to the trust's depositor (i.e., the
Sponsor), and any affiliated person of the depositor, except payments
for performing certain administrative services not relevant hereto.
Applicants request an exemption from section 26(a)(2)(C) to permit the
Trust to reimburse the Sponsor or AMEX, up to a maximum of 30 basis
points of the Trust's net asset value on an annualized basis, for the
following expenses: (a) annual licensing fees for use of the ``S&P
MidCap 400'' trademark; (b) federal and state annual registration fees
for the issuance of MID CAP SPDRs; (c) expenses of the Sponsor relating
to the printing and distribution of marketing materials describing MID
CAP SPDRs and the Trust; and (d) the initial fees and expenses incurred
in connection with the organization of the Trust, which will be
capitalized and amortized over five years on a straight-line basis.
10. Ordinarily, the sponsor of a UIT has several sources of income,
and expenses normally incurred by the sponsor in connection with the
creation and maintenance of a UIT can be offset against the income from
such sources. As the proposed Trust is structured, however, the usual
sources of income are not available because the Sponsor will not impose
a sales load, maintain a secondary market, or deposit Index Securities
into the Trust. Although the Sponsor's parent company, the AMEX, will
earn some income on the trading fees imposed on transactions occurring
on the exchange, applicants expect that such fees will generate
substantially less revenue than what would have been generated by a
normal sales load or sales charges on secondary market trades of MID
CAP SPDRs. In light of the above, applicants contend that the abuse
sought to be remedied by section 26(a)(2)(C)--``double dipping'' by UIT
sponsors collecting money from their captive trusts on top of the
profits already generated by sales charges and other sources of
income--will not be present if the requested exemption is granted. In
any event, the payment is capped at 30 basis points of the Trust's net
asset value on an annualized basis. Expenses in excess of that figure
will be absorbed by the Sponsor or the AMEX.
11. Section 14(a) provides, in part, that no registered investment
company may make an initial public offering of its securities unless it
has a net worth of $100,000, or provision is made in connection with
the registration of such securities that (i) firm agreements to
purchase $100,000 worth of such securities will have been made by not
more than 25 persons, and (ii) all proceeds, including sales loads,
will be refunded to investors if the investment company has a net worth
of less than $100,000 within 90 days after the effective date of the
registration statement.
12. Rule 14a-3 under the Act provides an exemption from section
14(a) for UITs that invest only in ``eligible trust securities'' and
agree to certain investor safeguards, including the refund of any sales
loads collected from investors. Applicants will comply in all respects
with rule 14a-3, except that the Trust will not restrict its
investments to eligible trust securities, which do not include equity
securities, and the Trustee will not refund the Transaction Fee
discussed above. The fact that the Trust's portfolio is invested in
equity rather than debt securities, applicants contend, does not negate
the effectiveness of the safeguards nor subject investors to greater
risk of loss due to investment in an undercapitalized investment
company. With respect to the Transaction Fee, applicants believe that
it is not a sales load, and therefore is not covered by the refund
provision. In addition, the Transaction Fee will be paid not by small
retail investors, but by institutional and other sophisticated, well-
capitalized investors who can afford the $850,000 purchase price of a
Creation Unit. Such investors are able to assume the risk, which will
be disclosed in the prospectus, of forfeiting the relatively small
additional amount represented by the Transaction Fee.
13. Section 17(a) generally prohibits an affiliated person of a
registered investment company from purchasing from or selling to such
company any security or other property. Because purchases and
redemptions will be ``in-kind'' rather than cash transactions, section
17(a) may prohibit affiliated persons of the Trust from purchasing or
redeeming Creation Units. Moreover, because the definition of
affiliated person includes anyone owning 5% or more of an issuer's
outstanding voting stock, every purchaser of a Creation Unit will be
affiliated with the Trust so long as there are twenty or fewer holders
of Creation Units. Applicants request an exemption from section 17(a)
pursuant to sections 6(c) and 17(b), to [[Page 167]] permit affiliated
persons of the Trust to purchase and redeem Creation Units.
14. Applicants contend that no useful purpose would be served by
prohibiting affiliated persons from making ``in kind'' purchases or
``in kind'' redemptions of Creation Units. The composition of the
Portfolio Deposit deposited by a purchaser or given to a redeemer will
be the same regardless of the investor's identity, and will be valued
pursuant to the same objective standards applied to valuing the Trust's
portfolio securities. Thus, ``in kind'' purchases and redemptions will
afford no opportunity for affiliated persons to effect a transaction
detrimental to the other holders of MID CAP SPDRs. Applicants believe
that ``in kind'' purchases and redemptions will not result in abusive
self-dealing or overreaching by affiliated persons of the Trust.
15. Applicants request an order pursuant to rule 17d-1 that would
permit the Trust to reimburse the Sponsor or the AMEX for the payment
by either such party to Standard & Poor's of the annual fee required
under a license agreement. The license agreement allows applicants to
use the S&P MidCap 400 Index as a basis for MID CAP SPDRs and to use
certain of Standard & Poor's trademark rights. Applicants believe that
relief is necessary because the Trust's undertaking to reimburse the
Sponsor (an affiliated person of the Trust) and/or the AMEX (an
affiliated person of the Sponsor) may constitute a joint enterprise or
joint arrangement in which the Trust is a participant, in contravention
of section 17(d) and rule 17d-1.
16. Applicants request a temporary exemption from the requirement
imposed by section 22(e) of the Act to provide payment or satisfaction
of redemptions within seven days following tender of a Creation Unit
for redemption. Applicant represents that the Trust's clearing agent,
NSCC, currently clears all trades through its system in five business
days and short settlement of trades will not be available in connection
with the MID CAP SPDR clearing process. NSCC is closed for business on
certain holidays. Under the present system, if a Beneficial Owner were
to tender a Creation Unit for redemption during a seven day period
preceding such a holiday, NSCC's five business day settlement system
would result in a redemption on the eighth calendar day following
tender, resulting in a technical violation of section 22(e). Applicants
request relief to permit redemption in five business days following a
redemption request until the effective date of rule 15c6-1 adopted
under the Securities Exchange Act, which will shorten the settlement
period to three business days. The rule provides for a transition
period during which securities may settle in four business days. After
the effective date of the rule, the NSCC will settle in accordance with
the rule and relief from 22(e) will no longer be necessary.
17. Applicants assert that the NSCC is the appropriate institution
to provide securities clearing services for the Trust. It is the
nation's largest clearing agency, clearing 95% of all domestic equity
trades, and has a well-established reputation in the financial
community. In addition, the clearance and settlement of four hundred
separate securities essentially as a single transaction requires
sophisticated clearing services. Applicants have found that NSCC is
able to provide these services and has enhanced its existing clearing
processes to handle purchases and redemptions of Creation Units. The
use of NSCC will provide beneficial owners of MID CAP SPDRs with state-
of-the-art securities handling, clearance, and transfer systems
services, which, given the complexity of mirroring the component shares
of the S&P MidCap 400 Index, is extremely important to all such owners.
Applicants also note that the Sponsor has found the clearing process
efficient and reliable when clearing SPDRS for the SPDR Trust.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. Applicants will not register a new series of the Trust, whether
identical or similar to Series 1, by means of filing a post-effective
amendment to the Trust's registration statement or by any other means,
unless Applicants have requested and received with respect to such new
series, either exemptive relief from the SEC or a no-action position
from the Division of Investment Management of the Commission.
2. The Trust's prospectus and the Product Description will clearly
disclose that, for purposes of the Act, MID CAP SPDRs are issued by the
Trust and that the acquisition of MID CAP SPDRs by investment companies
is subject to the restrictions of section 12(d)(1) of the Act.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-32257 Filed 12-30-94; 8:45 am]
BILLING CODE 8010-01-M